Investing: Should your 401(k) promote social goals?
A planned new federal rule aims to keep retirement fund managers focused on investment returns, not social good, said Noam Scheiber and Ron Lieber in The New York Times. The Labor Department, which sets the rules for retirement accounts, last week proposed to bar retirement plans from “making investments based on environmental, social and governance [ESG] considerations.” It’s directed squarely at ESG funds, which are designed to appeal to investors who want to push corporations toward social responsibility. The department contends that it’s “unlawful to sacrifice returns or accept additional risk” to promote a social goal. In theory, the rule change shouldn’t affect employers’ obligations if ESG funds show performance comparable to that of conventional ones. But many employers might not want to step into a “potential political minefield.”
One reason ESGs have multiplied in recent years is that they are, in fact, offering “comparable, if not market-beating, returns,” said Pippa Stevens in CNBC.com. Most of these funds achieve that by relying heavily on tech firms such as Microsoft “while having underweight exposure to industrials and energy.” The pandemic may be a turning point, though, with studies showing that companies with higher ratings on measures of governance and responsibility are “better equipped to weather the storm.” Retail investors are paying attention and pouring money into sustainable funds. Passive sustainable funds, built around an index of companies that score high on ESG measures, “are catching a very large tailwind” and have seen record inflows of money.
Investors are piling into ESGs because fund managers are pushing them, said Christopher Burnham in Barron’s. Ordinary index investing “has become a commodity business.” So now fund managers are looking for something that will let them stand out from competitors. Take BlackRock, the world’s largest asset manager. In January, the company announced that “sustainability” would become “BlackRock’s new standard for investing.” It didn’t mention that the sustainable funds come with higher fees. BlackRock’s iShares Global Clean Energy ETF carries an expense ratio that’s 40 points higher than its core S&P 500 index tracker. In fact, higher fees are a consistent feature of most ESG portfolios.
The government isn’t saying that asset managers can’t choose ESGs, said Matt Levine in Bloomberg.com. They can “if their performance meets the same standards as other funds.” It’s only illegal to “sacrifice performance for social good.” This is ostensibly about “protecting retirement savers from losing money,” but it’s also tempting to read a political undercurrent: Why should BlackRock get to decide that there should be less coal mining? The government is saying that “the people making ESG decisions should be the government,” and the asset managers and pension funds should “stick to making money.”